Clean growth is a safe bet in the climate casino

The debate on action over climate change is stuck. Despite copious words and many international conferences, including a UN summit in New York this week, emissions of greenhouse gases continue their upward march. Could this change? One can at least identify the necessary conditions. One is leadership. But the most important one is evidence that tackling climate change is compatible with prosperity. The possibility of combining the elimination of runaway climate change with rising living standards could help transform the debate.

All but the most obdurate sceptics must recognise that the probability of irreversible climate change is much greater than zero. But the cost of buying insurance against that risk also matters. Fortunately, these costs might be quite low and, in some respects, even negative: eliminating reliance on coal-generated electricity, for example, would produce health benefits. So would building more compact cities.

These examples both come from an important new report from the high-level Global Commission on the Economy and Climate. It makes five fundamental points. First, the nature of the infrastructure we build over the next 15 years or so will determine the chances of keeping average global warming to less than 2 degrees, the level above which many scientists think change might prove catastrophic. Second, to achieve such a change, the world must start changing its behaviour now. Third, over this period huge investments will be made in the infrastructure that is going to shape urban development, land use and energy systems. Fourth, by making the right investment decisions, the world could achieve at least half of the reductions in emissions needed by 2030. Finally, shifting the pattern of investment and innovation in the desired direction would add little economic cost and bring many benefits.

Win-win result

This is an encouraging message. Some of it clearly makes much sense. The report estimates subsidies to fossil fuels at $600 billion a year, against subsidies of just $90 billion to clean energy. This makes no sense at all. Again, consider the damage done by emissions. In

China

, reliance on coal has made the country the world’s largest emitter of greenhouse gases. In addition to the impact on the climate, the result has been terrible local pollution. This could lead to a win-win outcome: reductions in reliance on coal would lower local and global pollution.

A study from the International Monetary Fund argues that carbon pricing would benefit many countries even if all global benefits were ignored. On average, it suggests, the price justified by domestic considerations would be $57 a tonne across the top 20 emitters, far higher than recent prices in the EU's emission trading system. It would make sense to charge such a tax and use the proceeds to lower more damaging taxes. Similarly, the subsidies to consumption in many oil exporters are hugely wasteful and should be eliminated. Moreover, urban areas are responsible for about 70 per cent of energy use. In emerging economies they are growing rapidly. The commission's report contrasts Atlanta with Barcelona, two prosperous cities with similar populations. The former generates 10 times more carbon dioxide emissions from transport. Cities of the future should choose to be more like Barcelona.

Land use can be massively improved while raising the incomes of farmers. Unmanaged deforestation, for example, does not bring gain but huge economic and environmental waste.

Finally, in energy, we have been seeing massive declines in the cost of renewables, particularly in solar generation, together with an improved ability to manage intermittent power supplies. Renewables and other low-carbon energy sources (including nuclear) could, argues the report, account for more than half of new electricity generation over the next 15 years. Such transformations are to be achieved by a combination of pricing, investment, promotion of innovation and planning. All these require public and private actions. None of this is new. The public sector has always played a role in infrastructure and innovation.

How much would this cost? The report suggests the incremental investment costs of a low-carbon future over the current higher-carbon one would be very small. It suggests, for example, that annual investment costs for infrastructure needed in transport, energy, water systems and cities will be about $6 billion a year. The incremental costs of low- carbon infrastructure would be about $270 billion annually. Plausible economic models suggest the aggregate loss of world output by 2030, under the low-carbon option, would be equivalent to a one-year hiatus in economic growth. The costs of the financial crisis will almost certainly be far greater.

The report also makes sensible proposals to secure the transition it seeks. Among these are proper carbon pricing, phasing out of subsidies for fossil fuels and incentives for urban sprawl, promoting capital markets for low-carbon investments, encouraging innovation in low-emissions technologies, halting deforestation and, not least, accelerating the shift from polluting coal-fired power generation.

Time to act

Yet the crucial point is a low- carbon future need not be misery. With the right support from governments, the market could deliver greater prosperity and a far lower risk of a destabilised climate. It is unnecessary to persist in making massive unhedged bets in the climate casino. It is possible to combine growth with a less environmentally risky future. Continuing with business as usual is irrational. But the changes we must make should come now. Later will be too late. – Copyright The Financial Times Ltd 2014